There’s a wonderfully thoughtful new article by James Saft at the International Financing Review about a recent Fed examination of rise of both corporate cash levels and intangible capital.
It seems that
“Using a new measure, we show that intangible capital is the most important ﬁrm-determinant of corporate cash holdings. Our measure accounts for almost as much of the secular increase in cash since the 1980s as all other determinants together,” Antonio Falato and Jae Sim of the Federal Reserve and Dalida Kadyrzhanova of the University of Maryland write.
Saft’s theory about what’s happening (which makes sense to me) is
Having more of your value invested in and represented by intangibles creates some problems. For one thing, unlike a factory building or a piece of machinery, you can’t pledge intangibles as security against a loan. That makes borrowing more expensive or even, if a company is in distress, impossible. It follows then that firms with high levels of intangible capital, which is just about everyone, would hold more cash in order to keep their options open, either for investment or acquisitions or simply to weather the inevitable storms.
But then Saft goes on to say
One partial potential solution might be to make it easier for firms, perhaps through banking regulation, to borrow against their intangibles. That might encourage them to keep less cash on hand and invest more. It also, of course, might lead to banks going bust when they find it impossible to measure, much less seize and liquidate, the intangibles pledged against a loan.
Would banks go bust if they try to measure and liquidate intangibles?
It’s a question answered in a number of papers by my colleague Ken Jarboe at the Athena Alliance.
It’s also the question that led me as a consultant and former banker to create the ICounts toolset. Every company should have a basic information set about their intangibles, not only to show to their investors and bankers but also for their own internal management.
What does a basic information set look like? It’s not that different from what you use with tangible assets:
This kind of ICounting information isn’t a guarantee that banks won’t lose money. Accounting isn’t a guarantee either. The point is that intangibles are way too important to the ability of a company to succeed and to generate the cash it needs to survive. Banks should want this information today.
My vision is that some day in the not-too-distant future, banks will be willing to make more loans to companies with high intangible levels. In fact, it’s an opportunity for the right bank right now. Curious to know more? Join our movement for measures that matter.